Analysis—Market Prices, Government Set Prices & Taxes
Use the Wall Street Journal article below “Palladium Rally Leads Sudden Rebound in Metals” to analyze
the recent changes in the market for palladium.
a. Demonstrate the changes in price between mid-August and the end of September on a supply and
demand graph. Label your curves. Label your axes. Use specific price(s) and quantities when you can.
Consider the elasticity of demand when drawing the curve.
b. Give a brief explanation for any shifts in supply or demand.
c. Explain how the price elasticity of demand has affected price changes.
Palladium Rally Leads Sudden Rebound in Metals
The metal has surged 25% since mid-August. A sharp rally in palladium has led gains in other metals
Above, the open outcry pit at the London Metal Exchange. PHOTO: LUKE
By Amrith Ramkumar
Updated Sept. 24, 2018 12:51 p.m. ET
A runaway rally in the silvery-white metal palladium is revving up investor optimism for global growth.
Palladium, used in automobile converters that make toxic emissions less harmful, has surged 25% since
mid-August on softer-than-expected tariffs from China and the U.S., as well as signals that the Trump
administration wants to compromise on trade. Prices are now at their highest level in nearly seven
months, with the most-active futures on track to post their ninth straight session of gains Monday—the
longest such streak since October 2014, according to Dow Jones Market Data. Palladium is currently
trading for $1,055 a troy ounce.
Some investors look at palladium as an indicator for car demand and sentiment. Its rapid increase and
signs that the Chinese government wants to spur domestic growth have led a rally in other metals markets.
Picking Up Speed
Palladium's sudden rebound accelerated last week as investors reacted positively to the latest trade
Palladium is “a small market, but sometimes these small markets can lead in terms of sentiment,” said Tai
Wong, head of metals trading at BMO Capital Markets.
Some analysts appear much more confident that a full-blown trade war and slowdown in China won’t
materialize. Japan’s Nikkei Stock Average just had its best two-week stretch since July 2016, and the
Shanghai Composite logged its best week in 30 months. The Stoxx Europe 600 posted its largest oneweek advance since March.
Additionally, a sharp climb in new-car registrations in the European Union during July and August
boosted palladium prices, Commerzbank analysts said in a recent note to clients.
Investors have grown more optimistic about the outlook for palladium, with hedge funds and other
speculative investors increasing net bets on higher prices for the fourth consecutive week through Sept.
18. Unlike with other metals in recent weeks, bullish wagers have generally outnumbered bearish ones for
Johnson Matthey PLC, a London-based metals trader and one of the world’s largest makers of catalytic
converters, expects steady consumption of palladium for gasoline engines to fuel another supply deficit
Meanwhile, traders say the roughly $200-per-troy-ounce gap between palladium and its close relative
platinum, which has historically been more expensive, shows investors’ preference for the former.
Palladium is used for gasoline-engine cars, while platinum is used more heavily in catalytic converters
that go in diesel cars.
Despite the recent palladium rally, some traders expect metals prices to remain volatile as trade
discussions continue and more economic data is released. China scotched trade talks with the U.S. that
were planned for the coming days, The Wall Street Journal reported over the weekend.
But a continued metals rally could have investors feeling rosier. “The mood certainly has shifted,” Mr.
The current federal minimum wage is $7.25. On February 12, 2014, President Obama signed Executive
Order 13658, “Establishing a Minimum Wage for Contractors,” to raise the minimum wage to $10.10 for
all workers on Federal construction and service contracts. In a State of the Union address in 2014 President
Obama encouraged lawmakers to increase the minimum wage for all workers, nationwide, to $10.10.
In a February 2014 report, the CBO (Congressional Budget Office) estimated raising the federal minimum
wage to $10.10 an hour from $7.25 would reduce U.S. employment by 500,000 while pulling 900,000
people out of poverty.
a. In the market for Labor, what kind of market control is minimum wage? ____________________
b. Draw a graph of the labor market.
• Demonstrate the current and proposed minimum wage on the graph. Use specific price(s)
and quantities when you can. (Label the 500,000 lost jobs.)
• Show consumer surplus, producer surplus and economic surplus on the graph.
• Show deadweight loss if applicable.
c. If an increase in federal minimum wage is instituted, what could be the first effect on the supply and
demand for fast food? Demonstrate this on a graph for fast food. What would happen to the price for
fast food? Explain your graph.
d. Provide an analysis of the effect of minimum wage on those it is designed to protect. No graph
needed. Do not give your opinion. Use your answers to parts a-c above to inform your answer.
According to The Tax Foundation, an independent tax policy research organization, “the first U.S. state to
levy a gasoline tax was Oregon, which enacted a 1-cent per gallon tax in February 1919. During the
following decade every U.S. state and the District of Columbia followed suit. In 2006 the average state
gas tax was 20.8 cents per gallon. The federal gasoline tax was created with the Revenue Act of 1932, and
began as a temporary levy with a rate of 1 cent per gallon. Over the years the tax has increased
significantly, and in 2006 stood at 18.4 cents per gallon. The combined [consumer] burden of federal,
state and local gas taxes costs American drivers an average of 45.9 cents on every gallon purchased in
Notice: The total tax is NOT given in this excerpt.
a. Draw a supply and demand graph for gasoline in 2006. Assume the price of a gallon of gasoline is
$2.49 at the pump.
• When drawing the demand curve take into account if demand is elastic or inelastic
• Show the shift on the graph when sellers pay the tax
• Show the price paid at the pump
• Label the burden paid by consumers
• Show the price of gasoline if no taxes were assessed.
• Shade the area which is tax revenue
• Shade the area which is deadweight loss (if applicable)
b. Interpret the graph you created above by explaining how the tax burden is shared between buyers and
sellers in this market. (No values necessary in your response.)
c. Is this tax efficient? If yes, explain why. If not, explain why the government would assess the tax.
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